Three years ago, Robin Walker didn't have any money invested to cover either of her children's post-secondary school costs. While the legal secretary made a reasonable salary, she knew she wouldn't be able to send daughter Sheriden and son Clinton, who were 13 and 10 at the time, to college while maintaining her current standard of living. So when Walker heard about 529 college savings plans (state-sponsored investment accounts) on the job, they sounded like a relatively easy, tax-free way to invest for her children's college education. These plans give you the ability to invest money in a pre-selected portfolio of stocks and bonds for future use toward educational expenses. They also provide tax-free savings on the interest earned, as long as the money is used for education. Some states even offer a tax deduction for state residents. The 529 plan option seemed like an even sweeter deal when the Washington, D.C.-based law firm where Walker works offered the plan as an additional savings vehicle for its employees. "I have other investment accounts with my employer and I trust what they offer," says Walker, who placed $1,500 in Maine's NextGen College Investment Plan for her daughter and $500 for her son. She made monthly contributions of $500 and $200, respectively. Unfortunately, within a year of setting up her 529 plan, Walker watched the declining market chip away at her children's education funds. Managed by Merrill Lynch, the NextGen College Investing Plan was down 22.8% through the first three quarters of 2003. A large loss prompted Walker to discontinue regular contributions to the plan for daughter Sheriden. "I just felt the market was too risky with college just around the corner," she says. The stock market's negative trend has been especially troublesome for parents like Walker who have children nearing college age. Many are worried about having to raid their retirement funds to pay for college costs. And with good reason: Next to buying a home, paying for college—public or private—is one of the biggest expenses a family will incur. Public college and university costs rose 14% in 2003. According to the College Board, a national nonprofit association that connects students with college opportunities, one year at a state school, including room and board, costs around $10,636; a private school costs $26,854. Walker will rely on other resources when she sends Sheriden off to college in 2005. Because she has time on her side with Clinton, she's leaving the $7,000 currently in the 529 plan, hoping the market takes a turn for the better before it's his turn for college. Parents have a varied number of college financing options, but the most popular tools of late are 529 college savings plans. About $30 billion in assets is now invested in 529 college savings plans and investors are expected to add some $50 billion more by 2007. While a 529 college savings plan is an important new saving and investing tool, parents need to be "better schooled," says Joseph F. Hurley, CEO of Savingforcollege.com in Pittsford, New York, and author of The Best Way to Save for College: A Complete Guide to 529 Plans (Bonacom Publications; $22.95). Hurley notes that the benefits of investing in 529 plans are that, unlike most other tax-advantaged savings plans, you can start out making very small contributions, there are no age or income limits, and they allow extremely high contributions. But many plans charge management fees, some higher than others, and many plans have limited investment options. And an added wrinkle is that several state plans invest in mutual funds that have been implicated in the federal government's investigation of mutual fund trading violations. Strong Capital and Putnam Investments are among those companies implicated in the scandal. (See "Caught in a Storm," this issue.) But parents shouldn't be dismayed, says Hurley. To get the most bang for their buck, "they just have to understand how 529 plans work and how to manage them," he says. SIZING UP 529 PLANS There are two kinds of 529 plans, which get their name from section 529 of the tax code: prepaid tuition plans, which let you lock in the price of your child's future tuition by prepaying at today's rate now, and college savings plans, which are investment programs that let you make account contributions toward a beneficiary's qualified higher education expenses (tuition, fees, room and board, books, and supplies). The IRS imposes a 10% penalty as well as income taxes on gains for unqualified withdrawals. With a prepaid tuition plan, parents, grandparents, and other interested persons can purchase units that can later be redeemed for a percentage of tuition at any of that state's eligible colleges or universities. The maximum contribution is the amount necessary to prepay the number of years the child is expected to attend that state's institution of higher learning. Tuition credits can also be applied if your child chooses to go to an out-of-state school. What if your child is drafted by the NBA and forgoes college altogether? With a 529 college savings plan, you can change the beneficiary—it can even be yourself. Most states allow contributions in excess of $200,000. As of 2002, you can contribute up to $55,000 in one year for each beneficiary ($110,000 a year for couples) as long as no further gifts to or for that particular individual are made in the ensuing five years. Funds in 529 college savings plan accounts are generally invested in securities managed by outside investment specialists. The rate of return of each plan is based on the performance of the investments it holds. Kyle F. Winkfield is the vice president at Greenbelt, Maryland-based American College Funding Association, an education financial consulting firm. He says that many parents who invest in 529 college savings plans think they have their child's tuition covered, but many parents don't understand the inherent risk involved in investing. "Even if you start saving for a newborn's education now, because of market fluctuations, you may not have an adequate nest egg when it's time to liquidate those funds for college," he explains. CHOOSING A 529 COLLEGE SAVINGS PLAN All 50 states offer one or both types of 529 plans. Parents seeking the best deal on any given plan should compare one state's offering to another. (See table.) They also should ask a series of questions: Who is the fund manager? Does the plan offer a variety of mutual funds, including fixed-income investments? Does the plan impose any harsh restrictions? For example, New York penalizes investors who withdraw money if their accounts have not been open for at least three years. Is it favorable toward nonresidents? Can I buy the plan directly from the state or plan sponsor, or do I have to go through a broker-dealer? Does my state offer additional tax advantages? What happens if my state changes fund managers? For instance, last year, New York State dumped TIAA-CREF as the manager of its 529 plan and started a joint venture with UPromise and Vanguard. Shannon Zimmerman, a fund analyst at Morningstar Inc., a Chicago-based firm that tracks more than 6,000 mutual funds, says you'll especially want to keep four important factors in mind: the management team, the plan's performance record, any fees involved, and your individual time frame and needs. "The fee structure of a 529 plan can be extremely complex," says Zimmerman. It can include fees for enrollment, annual maintenance, management, and sales charges. Though they vary from state to state, Zimmerman says that, on average, fees for a reasonably priced plan should not top 1% of what you're investing into the plan. He notes that TIAA-CREF, which manages a number of plans, and Vanguard offer some of the lowest fees. But what difference do fees make? "Over the long haul they can make a huge di fference," says Zimmerman. For example, if you take into account the management fees and expense ratio of its underlying funds, the Wyoming College Achievement Plan charges an annual fee of 2.21% of its total assets. The Utah Educational State Plan, on the other hand, charges a fee of 0.37% in an age-based portfolio with an approximate 50/50 option of equity and fixed-income funds. With a 10% annual return on an initial investment of $10,000, in 18 years the Wyoming plan will be worth $38,584. In comparison, the Utah plan will be worth $52,327. Winkfield counsels clients to not consider investing in a 529 plan if they're "not on track for retirement." Winkfield advised Walker, who had some debt and a small retirement account, to take out student loans for her daughter's education and, instead of contributing $700 a month to a 529 plan, to invest $500 in a tax shelter, such as a universal life insurance policy earning a fixed interest rate comparable to what she's paying out. Walker could use the remaining $200 to make accelerated monthly payments toward her current debt. "In 10 years, she can use the money for retirement, help her daughter repay student loans, or whatever she may need," says Winkfield, who suggested a universal life insurance policy because of its cash accumulation and tax-favored withdrawal characteristics, which allow tax- and penalty-free withdrawals for any reason at any time. MANAGING A 529 PLAN Whether you already invest in a 529 college savings plan or are still considering one, you have options to protect your funds and your children's future. Arman Rousta, president and founder of New York City-based 401kid (www.401kid.com), an Internet-based software company that designs education financial planning products, suggests the following: Consult an objective adviser. "You can't really expect unbiased advice from financial advisers who work for 529 plan fund managers," says Rousta. There is a software tool on the 401kid Website that gives very specific advice on which plans are best suited for any given family's situation. Diversify your 529 portfolio. Rousta reminds his clients who are parents that most 529 college savings plans offer an age-based option that automatically switches assets to more conservative securities as the child gets older and college draws closer. Age-based portfolios adjust risk based on the beneficiary's age. The idea is to have more money invested in stocks in the early years when you have time to ride out market fluctuations, and then switch to more fixed-income vehicles in later years. Roll money over to another plan. Because Walker felt comfortable investing in a 529 plan offered by her employer who serviced her other investments, and because she was not completely educated in terms of 529 plans, she accepted what was offered. She was unaware that she could have rolled her contributions over into the plan in Maryland where she lives, which offers a $2,500 state income tax advantage. Some plans assess a penalty for rolling over assets, Rousta notes. Zimmerman stresses that 529 college savings plans will fail or succeed depending on their management team's tenure, stock-picking acumen (ability to create a careful balance between risk and reward), and the price of the plan. Many plans are still in their infancy. Hurley says today's 529 plans are much more flexible than the ones that were popular two years ago, and that parents can expect to see even more plan improvements in the future. Though 529 plans may not be the be-all and end-all to saving for college, they still offer parents greater flexibility than having to bank solely on student aid and scholarships to satisfy their child's yearning for higher learning. 529 College Savings Plan Resources The Best Way to Save for College: A Complete Guide to 529 Plans by Joseph F. Hurley (Bonacom Publications; $22.95) The 529 College Savings Plan: The Smart Way to Fund Higher Education by Richard A. Feigenbaum and David J. Morton (Sphinx Publications; $16.95) "Saving for Education: A Long-Term Investment, A Guide to Understanding 529 Plans" Investment Company Institute, www.ici.org/pdf/bro_529_plans.pdf "Smart Saving for College—Better Buy Degrees: 529 Plans and Other College Savings Options," National Association of Securities Dealers, www.nasd.com/Investor/ choices/college/529_saving_printer.asp SmartMoney University's College Planning, http:// university.smartmoney.com/Departments/CollegePlanning Morningstar's College Savings Center www.morningstar.com/centers/529.html Kiplinger's State College Savings Planswww.kiplinger.com/tools/managing/college/savings/ 2001/states01.html Savingforcollege.com.www.savingforcollege.com College Savings Bank www.collegesavings.com College Savings Plan Network www.collegesavings.org Tomorrow's College Investment Plan www.enterprise529.com The College Board www.collegeboard.com ALABAMA Â ALÂ Higher Education 529 Fund Van Kampen Inv 151.80 12/31/03 0.64 1.78 1,000 (866) 529-2228 ALASKA Â AKÂ Manulife College Savings T. Rowe Price 632 (billion) 11/03/03 0.55 1.32 1,000 (866) 222-7498 Â AKÂ T. Rowe Price College Savings Plan T. Rowe Price 221.70 12/31/03 0.44 0.80 250 (800) 369-3641 Â AKÂ University College Savings Plan T. Rowe Price 61.50 12/31/03 0.44 0.80 250 (800) 478-0003 ARIZONA Â AZÂ CSB Family College Savings Program College Savings Bank 52.50 06/30/03 — — 250 (800) 888-2723 Â AZÂ PF 529 College Savings Plan Pacific Funds — 12/31/03 0.95 2.55 500 (800) 772-2333 Â AZÂ SM&R Family College Savings Program SM&R VALIGN="TOP">6.70 12/31/03 0.50 2.75 500 (800) 667-3239 Â AZÂ W&R InvestEd Plan Waddell & Reed 132.20 12/31/03 0.76 0.89 500 (800) 923-3355 ARKANSAS Â ARÂ GIFT College Investment Plan Mercury Advisors 102.00 03/31/03 — — 1,000 (877) 615-4116 CALIFORNIA Â CAÂ Golden State ScholarShare College TIAA-CREF TFI 1,238.60 12/31/03 0.07 0.15 25 (877) 728-4338 COLORADO Â COÂ Scholars Choice College Savings Citigroup Global Markets Inc 1,273.80 12/31/03 0.51 0.80 25 (888) 572-4652 Â COÂ Stable Value Plus College Savings Program Travellers Insurance 14.30 12/08/03 0.10 0.22 25 (800) 478-5651 CONNECTICUT Â CTÂ Connecticut Higher Education Trust TIAA-CREF TFI 404.90 12/31/03 0.06 0.15 25 (888) 799-2438 DELAWARE Â DEÂ College Investment Plan Fidelity Investments 168.30 12/31/03 0.58 0.91 500 (800) 544-1655 DISTRICT OF COLUMBIA Â DCÂ 529 College Savings Plan Calvert Asset Mgt 20.20 12/31/03 0.15 1.75 100 (800) 987-4859 FLORIDA Â FLÂ College Investment Plan FL Prepaid Coll Board — 12/31/03 — — 25 (800) 552-4723 GEORGIA Â GAÂ Higher Education Savings Program TIAA-CREF TFI 127.40 12/31/03 0.07 0.13 25 (877) 424-4377 HAWAII Â HIÂ TuitionEDGE Delaware Investments 13.90 12/31/03 0.00 0.00 15 (866) 529-3343 IDAHO Â IDÂ College Savings Program (Ideal) TIAA-CREF TFI 37.50 12/31/03 0.07 0.14 25 (866) 433-2533 ILLINOIS Â ILÂ Bright Start College Investment Plan Citigroup Global Markets Inc 866.50 12/31/03 0.51 0.63 25 (877) 432-7444 INDIANA Â INÂ CollegeChoice 529 Investment Plan One Group Admin Srvc 195.70 12/31/03 0.35 1.49 50 (866) 400-7526 IOWA Â IAÂ College Savings Iowa IA State Treasurer Vanguard group 676.10 12/31/03 0.05 0.15 50 (888) 672-9116 Â IAÂ Principal College Savings Program Principal Financial Group — 12/31/03 — — — (800) 986-3343 KANSAS Â KSÂ Learning Quest Education Savings American Century 599.90 12/31/03 0.52 0.95 2,500 (800) 579-2203 Â KSÂ Schwab 529 College Savings Plan American Century Charles Schwab 23.10 12/31/03 0.61 1.14 2,500 (800) 435-4000 KENTUCKY Â KY Education Savings Plan Trust TIAA-CREF TFI 45.10 12/31/03 0.07 0.15 25 (877) 598-7878 LOUISIANA Â LAÂ State Tuition Assistance and Revenue State of LA 27.80 06/30/03 — — 10 (800) 259-5626 MAINE Â MEÂ NextGen College Investing Plan Merrill Lynch 2,137.80 12/31/03 0.64 1.57 250 (877) 463-9843 MARYLAND Â MDÂ College Investment Plan T. Rowe Price 456.20 12/31/03 — — 250 (884) MDGRAD MASSACHUSETTS Â MAÂ U.Fund College Investing Plan Fidelity Investments 1,148.50 12/31/03 0.58 0.88 1,000 (800) 544-2776 MICHIGAN Â MIÂ Education Savings Program TIAA-CREF TFI 566.30 12/31/03 0.07 0.13 25 (877) 861-6377 MINNESOTA Â MNÂ College Savings Plan TIAA-CREF TFI 184.90 12/31/03 0.07 0.13 25 (877) 338-4646 MISSISSIPPI Â MSÂ Adv Affordable College Savings Program TIAA-CREF TFI 2.30 12/31/03 0.08 0.20 3,000 (800) 486-3670 Â MSÂ Affordable College Savings Plan TIAA-CREF TFI 23.30 12/31/03 0.07 0.13 25 (800) 486-3670 MISSOURI Â MOÂ Adv Svg for Tuit Program TIAA-CREF TFI 24.60 12/31/03 0.08 0.20 3,000 (888) 414-6678 Â MOÂ Saving for Tuition Program TIAA-CREF TFI 417.40 12/31/03 0.07 0.14 25 (888) 414-6678 MONTANA Â MTÂ Family Education Savings Program College Savings Bank 69.90 06/30/03 — — 250 (800) 888-2723 Â MTÂ Pacific Funds 529 College Savings Program Pacific Funds 23.00 12/31/03 0.95 2.55 500 (800) 888-2723 NEBRASKA Â NEÂ AIM College Savings Plan Union Bank & Trst Co AIM 141.20 12/31/03 0.89 1.82 500 (800) 959-4246 Â NEÂ College Savings Plan Union Bank & Trst Co 392.60 12/31/03 0.05 1.07 — valign="top">(888) 993-3746 ">Â NEÂ TD Waterhouse College Savings Plan Union Bank & Trst Co 70.40 12/31/03 0.05 1.07 — (877) 408-4644 NEVADA Â NVÂ American Skandia College Savings American Skandia Strong Capital Mgmt 45.00 12/31/03 1.44 1.90 250 (877) 452-9782 Â NVÂ Columbia 529 Plan Columbia Management 24.60 12/31/03 0.59 1.49 1,000 (877) 994-2529 Â NVÂ Strong 529 Plan Strong Capital Mgmt 6.90 12/31/03 0.60 1.00 250 (877) 529-5295 Â NVÂ UPromise College Fund UPromise 49.20 12/31/03 — — 250 (800) 587-7305 Â NVÂ Vanguard 529 College Savings Plan Vanguard Group 318.30 12/31/03 0.15 0.36 3,000 (866) 734-4530 NEW HAMPSHIRE Â NHÂ Fidelity Advisor 529 Fidelity Investments 575.30 12/31/03 0.46 1.07 1,000 (800) 522-7297 Â NHÂ UNIQUE College Investing Plan Fidelity Investments 2,120.90 12/31/03 0.58 0.90 1,000 (800) 544-1722 NEW JERSEY Â NJÂ Better Educational Savings Trust Franklin Templeton 234.00 12/31/03 — — 25 (877) 465-2378 Â NJÂ Franklin Templeton 529 Franklin Templeton 83.10 12/31/03 — — 250 (800) 223-2141 NEW MEXICO Â NMÂ Arrive Education Savings Plan Schoolhouse Capital — — — — 250 (877) 277-4838 Â NMÂ CollegeSense 529 Higher Education Schoolhouse Capital, NY Life Inv Mgt 78.30 06/30/03 0.63 1.38 250 (866) 529-7367 Â NMÂ ScholarsEdge Schoolhouse Capital, Oppenheimer Funds 80.00 09/30/02 0.63 1.35 250 (866) 529-7283 Â NMÂ The Education Plan Schoolhouse Capital — — — — 250 (877) 337-5268 NEW YORK Â NYÂ 529 College Savings Program Vanguard Group, UPromise 2,242.10 12/31/03 0.08 0.22 25 (877) 697-2837 Â NYÂ Columbia NY 529 Plan UPromise, Columbia Management 1.20 12/31/03 0.59 1.50 1,000 (800) 774-2108 NORTH CAROLINA Â NCÂ National College Savings Program College Foundation 95.50 12/31/03 — — 5 (800) 600-3453 Â NCÂ Seligman CollegeHorizon Fund College Foundation, J&W Seligman 32.20 12/31/03 — — 250 (800) 600-3453 NORTH DAKOTA Â NDÂ College SAVE Morgan Stanley — — — — 25 (866) 728-3529 OHIO Â OHÂ CollegeAdvantage 529 Savings Plan Putnam Inv Mgmt 492.00 06/30/03 0.58 1.40 15 (800) 233-6734 Â OHÂ Putnam CollegeAdvantage Savings Plan Putnam Inv Mgmt 2,622.30 09/30/03 0.58 1.40 25 (800) 225-1581 OKLAHOMA Â OKÂ College Savings Plan TIAA-CREF TFI 70.00 12/31/03 0.07 0.13 25 (877) 654-7284 OREGON Â ORÂ MFS 529 Savings Plan MFS Investment Mgt 92.80 12/31/03 0.70 2.67 250 (866) 637-7526 Â ORÂ USA CollegeConnect Schoolhouse Capital — — — — 500 (800) 457-9001 PENNSYLVANIA Â PAÂ Tap 529 Investment Plan Delaware Investments 94.20 12/31/03 0.61 1.29 1,000 (800) 440-4000 RHODE ISLAND Â RIÂ CollegeBoundfund Alliance Capital Mgmt 4,192.00 12/31/03 0.50 1.85 1,000 (888) 324-5057 Â RIÂ JPMorgan Higher Education Plan Alliance Capital Mgmt, JPMorgan Fleming 21.70 12/31/03 0.66 1.05 1,000 (877) 576-3529 SOUTH CAROLINA Â SCÂ Future Scholar 529 Savings Plan Banc of America Adv 234.50 12/31/03 0.35 1.48 250 (888) 244-5674 SOUTH DAKOTA Â SDÂ CollegeAccess 529 Plan PIMCO Funds 165.30 12/31/03 0.38 1.28 250 (866) 529-7462 Â SDÂ Core4College 529 Plan PIMCO Funds, Legg Mason — — — — 1,000 (800) 800-3609 TENNESSEE Â TNÂ BEST Savings Plan TIAA-CREF TFI 13.10 12/31/03 0.07 0.15 25 (888) 486-2378 TEXAS Â TXÂ Tomorrow's College Investment Plan Enterprise Capital 54.90 12/31/03 0.15 1.75 25 (800) 445-4723 UTAH Â UTÂ Educational Savings Plan Trust UESP Trust 592.70 12/31/03 0.03 0.20 25 (800) 418-2551 VIRGINIA Â VAÂ CollegeAmerica American Funds 5,328.90 12/31/03 0.40 2.27 250 (800) 421-4120 Â VAÂ Educational Savings Trust VA College Savings Pl Board 148.00 06/30/02 — — 25 (888) 567-0540 VERMONT Â VTÂ Higher Education Investment Plan TIAA-CREF TFI 24.30 12/31/03 0.07 0.15 25 (800) 637-5860 WEST VIRGINIA Â WVÂ Cornerstone Smart 529 The Hartford Ins Co 14.00 12/31/03 0.54 1.31 500 (866) 574-3542 Â WVÂ Leaders Smart529 The Hartford Ins Co 5.80 12/31/03 0.53 1.38 500 (866) 574-3542 Â WVÂ SMART 529 College Savings Option The Hartford Ins Co 237.40 12/31/03 0.48 1.00 500 (866) 574-3542 WISCONSIN Â WIÂ EdVest College Savings Program Strong Capital Mgmt 433.00 12/31/03 0.85 1.00 250 (888) 338-3789 colspan="9" valign="top">WYOMING Â WYÂ College Achievement Plan Mercury Advisors 14.20 03/31/03 — — 1,000 (877) 529-2655